Delaware Business Litigation Report

Chancery Invokes the Implied Covenant to Invalidate Shareholder Rights Plan

Whitestone REIT Operating Partnership L.P. v. Pillarstone Capital REIT, C.A. No. 2022-0607-LWW (Del. Ch. Jan. 25, 2024)
In Delaware, the implied covenant of good faith and fair dealing is inherent in all contracts and ensures that the “fruits of the bargain” are not frustrated by arbitrary or unreasonable action.

Here, under the governing partnership agreement, Whitestone, a limited partner, had the unilateral right to redeem its partnership units. When Whitestone began considering a redemption, Pillarstone, the general partner, adopted a shareholder rights plan that would have resulted in negative economic consequences for Whitestone had it exercised its redemption right. In response, Whitestone filed suit against Pillarstone alleging, among other things, a breach of the implied covenant of good faith and fair dealing.

In its post-trial decision, the Court of Chancery found that Pillarstone breached the implied covenant by frustrating Whitestone’s express rights in the partnership agreement. According to the Court, it was implicit in the agreement that Pillarstone could not undertake “self-interested actions to impede Whitestone from redeeming” its units, and the shareholders rights plan breached the implied covenant by frustrating Whitestone’s ability to exercise its redemption right. The Court remedied the breach by invalidating the shareholders rights plan as to Whitestone, allowing Whitestone to submit its units for redemption.

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